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Regulatory uncertainty a catalyst for QDIA re-evaluation
In this article
- Recent court rulings along with the Department of Labor (DOL)’s “Fiduciary Rule” have put a spotlight on the legal obligations imposed on fiduciaries
- Many plans have not conducted a serious evaluation of their QDIA for a number of years highlighting the need for a periodic top-to-bottom evaluation
- Advisors are approaching the QDIA selection and evaluation process with a greater due diligence standard
Recent court rulings, along with the Department of Labor (DOL)’s “Fiduciary Rule” have put a spotlight on the legal obligations imposed on fiduciaries when selecting plan investment options, especially a Qualified Default Investment Alternative (QDIA). Plan sponsors have increasingly found themselves targeted by class action lawsuits challenging the selection and retention of retirement plan investments and their accompanying fees. The success or failure of these suits can often hinge upon the process used by the plan’s fiduciaries when selecting and monitoring the plan’s investment menus, including QDIAs.
QDIA selection and monitoring obligations imposed on fiduciaries by ERISA has not been altered, however, many plans have not conducted a serious evaluation of their QDIA for a number of years highlighting the need for a periodic top-to-bottom evaluation. According to recent co-sponsored research with Plan adviser magazine, over 77% of plan advisers are either somewhat or very likely to reevaluate their client’s QDIAs in the next 12 months.
Additionally, advisors are approaching the QDIA selection and evaluation process with a greater due diligence standard. Of the advisors surveyed, glide path construction and pricing ranked as the top two most important criteria used in the evaluation, selection, and monitoring of a target date fund as a QDIA. Rounding out the top five was 5 year performance, volatility and downside capture.
When selecting and monitoring a plan’s QDIA, plan fiduciaries are required to follow a prudent process when making fiduciary decisions. ERISA makes clear that the process includes requiring fiduciaries to take into account, as appropriate, the plan’s unique circumstances, including the plan’s size, participant demographics, savings patterns, and retirement patterns.
To take a simple example, if the workforce routinely retires at age 55, it would be appropriate to take that fact into account when selecting a target date fund. Similarly, if plan participants also have benefits under a defined benefit plan that will provide a base level of income during retirement, it would be appropriate to take this into account during the fiduciary decision making process.
Plan fiduciaries must also be mindful and respond to shifts in any of the factors that served as the basis for their initial selection of the plan’s QDIA. For example, any changes in the default investment’s fees, investment strategy or significant shifts in the makeup of the employer’s workforce will warrant review. The Supreme Court recently bolstered this ongoing duty to prudently monitor plan investments through its unanimous 2015 opinion in the case of Tibble v. Edison. In that decision, the Court reaffirmed that fiduciaries have “a continuing duty to monitor trust investments and remove imprudent ones” and that “[t]his continuing duty exists separate and apart from the trustee’s duty to exercise prudence in selecting investments at the outset.” If the plan sponsor, advisor, or other plan fiduciary fails to follow a prudent process when the QDIA is selected or fails to prudently monitor the QDIA over time, there is no fiduciary relief.
Adopting a QDIA Policy
- Plans should consider adopting a written QDIA policy as part of the investment policy statement
- When updating or adding a QDIA policy, plans should consider language generally describing how default investments will be selected, monitored, and evaluated on an ongoing basis in relation to the suitability of the employee population
Do your plan’s QDIA’s serve the needs of the participants? Start your review today. See our plan sponsor paper and checklist "Qualified Default Investment Alternatives: Meeting Your Responsibilities in the New Fiduciary World" as guide for determining whether, and how, to replace a plan’s QDIA.
The statements contained herein are based upon the opinions of Nuveen. All opinions and views constitute the judgments as of the date of writing and are subject to change at any time without notice. Certain information was obtained from third‐party sources, which we believe to be reliable, but is not guaranteed for accuracy or completeness. This material is for informational and educational purposes only and should not be considered specific legal, investment, business strategy or tax advice. Neither Nuveen nor any of its affiliates, directors, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this presentation.
Nuveen, LLC delivers the expertise of TIAA Investments and its independent investment affiliates. Nuveen Securities, LLC, member FINRA and SIPC, is a subsidiary of Nuveen, LLC.
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